Mortgage servicing assets are written down when long-term rates decline, since the likelihood of refinancing -- and a loss of servicing fees on the paid-off loans -- rises. When rates rise, the opposite happens.
O'Connor also estimates SunTrust will lay off roughly 900 staffers working on nonperforming loans and repossessed assets, for annual savings of roughly $150 million, "driving our higher EPS estimates."
SunTrust reported a second-quarter efficiency ratio of 66.56%, improving from 68.83% a year earlier. The efficiency ratio is, essentially, the number of pennies of overhead for each dollar of revenue. During the company's second-quarter conference call in July, SunTrust CFO Aleem Gillani said "We remain committed to achieving an approximate 65% efficiency ratio in 2013 and to our long-term target of below 60%."
O'Connor estimates that the long-term expense decline as the housing market recovers "is worth $150m [annually] or $0.20 per share and is not reflected in consensus estimates."SunTrust's shares closed at $32.55 Thursday. The shares have returned 16% this year, following a return of 62% during 2012. The shares trade for 1.25 times their reported June 30 tangible book value of $26.08, and for 11 times the consensus 2014 EPS estimate of $2.97, among analysts polled by Thomson Reuters. The consensus 2015 EPS estimate is $3.32. STI data by YCharts
Interested in more on SunTrust? See TheStreet Ratings' report card for this stock. -- Written by Philip van Doorn in Jupiter, Fla. >Contact by Email. Follow @PhilipvanDoorn
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